Fifty percent of American households support corporations by buying stock. But
the level of trust people have placed in the corporate world by making these
investments has not been reciprocated by reliable information about the
financial performance and the actual financial condition of the corporation.
Both individual and professional investors are becoming more cautious, with
many reducing or withdrawing their investments.
+ SEC: Investor Information
This section of the SEC site includes speeches and documents related to the May
2002 Investor Summit held at
the SEC's Washington headquarters. It also features informative pages that
explain such topics as "pro forma" financial info and "high yield"
investment scams, as well as indexes of Investor Alerts and
Investor Education Links.
+ SEC Filings and Forms (EDGAR)
The SEC requires all public companies (except foreign companies and companies
with less than $10 million in assets and 500 shareholders) to file registration
statements, periodic reports, and other forms electronically through EDGAR.
Anyone can access and download this information for free. Here investors can
find links to a complete list of filings available through EDGAR and
instructions for searching the EDGAR database.
+ The Corporate Library
The Corporate Library is a Web site focused on international corporate
governance research. It contains a free searchable database of Fortune 500
companies and CEOs, where investors can research information including the
company's performance and market capitalization, corporate governance policy,
board of directors and investor relations. It also features a comprehensive
Corporate Governance Glossary of terms.
+ Hoovers Online
While researching a company on Hoover's Online, investors can find information on
its competitors and subsidiaries, as well as the company's financial
information. "Company capsules" also contain links to current news stories
mentioning the company. Also, investors should check the Hoover's Online
homepage for a list of recent corporate executive changes in a section entitled
"Executives on the Move.".
ValuEngine.com is a stock valuation, investment forecasting service developed
by researchers at Yale University. Their method uses computer models to
determine the correct price of an investment. The site shows the relative
attractiveness of a stock in terms of an individual's investment strategy, and
forecasts the value of the stock over time. [Free registration required].
We are beginning to understand the importance of verification, validation, and
authentication of corporate claims about business performance. Everyone with an
interest in our economic health and progress will demand sounder ways to find
truth in time to make a difference. Smart, responsible corporations will help
this process develop and become leaders in business authenticity.
Investors now see the conflicts of interest and the outright lies about
corporate financial performance: the defensive posturing of corporations,
auditors, politicians, and Wall Street. Their first line of defense is to
placate investors by creating the illusion of reform -- a lot of political talk
followed by unenforceable rules. After all, much of the political business and
financial establishment does not want reform. Disturbing the cozy relationship
between Congress and the companies who contribute to political campaigns would
upset a long tradition. Too much change would expose them and take them out of
Managed mendacity, systematically applied to the investing public, has become
the new science of publicly traded corporations. The one thing corporate
leaders know for sure is how to handle the investors. They know just how much
information to provide and what kinds of information to hide, and they can rev
up the engines of hype and misinformation at the drop of a hat. Lies and
deception at their basest level help the inner circle achieve personal goals of
greed and cover up their incompetence as executives. Gamesmanship has replaced
business management competence as executives and their boards have focused on
managing the stock first, and the business second, and strategic value last.
This pattern of conduct is not what investors came to the market for and is the
reason why many are now thinking twice about staying unless new methods of
verifiable data on corporate performance are developed. The performance reports
of Cendant, Waste Management, Sunbeam, Global Crossing, Tyco International, and
Enron were certified as accurate by their auditors. But Cendant allegedly
booked $500 million in fake revenue over three years. Waste Management defended
itself in seventy class-action security fraud complaints and accounting
scandals and became the most frequently sued company of 1998. Sunbeam was
charged with accounting fraud for shifting $21.5 million from reserves to
income to cover up massive discounts and inflated sales forecasts. Global
Crossing was charged with Enronlike accounting fraud and inflated revenue
reporting. Tyco International was investigated for hiding debt to make revenues
look better. Enron and the others are just the tip of a deeply submerged
iceberg. The root of some of these cases goes back for more than a decade. None
of them received much attention until the Enron story began to develop and the
markets declined for the second straight year. The sensitivities of investors
have become sharply tuned, and Enron pushed the sensors to the full tilt.
Enron and these other companies wanted to make revenue look stronger than it
actually was during each reporting period. They shifted expense, debt, and
sales forecast numbers from book to book to create the illusion of financial
stability. They concocted their stories carefully, never stretching too much at
a time. Their reports seemed reasonable, directionally right. Falsehood was
concealed among accurate facts. The business leaders who were best at this
deception were moneymakers on a "five-year" mission. Their goal was to manage
an initial public offering, or take over a solid publicly traded company, push
the stock to the sky, and cash out. In the process of making things look better
than reality, insiders sold off at market high points to line their own
pockets. If investors cannot validate the factual basis of revenue reporting,
return on capital, and reports of cash flows, logically, they should not
invest. But with all this deception and deliberate concealment, there is no way
to validate all the reporting. This is the investors' "catch-22."
It gets worse. If only there were a simple checklist of indicators, like the
following, that would give a signal that something is amiss:
- Abrupt turnover at CEO and key senior executive positions without convincing
explanations about why people are leaving (Jeffrey Skilling, for example,
resigned as CEO of Enron for "personal reasons.")
- Cash-out moves by senior management (i.e., insider stock trading in large and
- Restatements of earnings
- SEC inquiries
- SEC warnings for aggressive accounting
- Reductions in shareholder equity
- Special and complex partnerships and financial instruments
- Elaborate compensation and stock option plans
- Missed earnings
- Complex SEC filings
- Sudden downgrades in credit/bond ratings
- Withdrawal by hedge funds
However, keeping up with the indicators of lies and deception is like trying to
paint a moving train. Since the Enron accounting spill, corporations will move
to other devices to play their games. They will be extremely careful in the
future, and they will change their patterns. Any system as complicated as our
system of investing cannot be simplified to a set of bullet points. Investors
can't simply rely on a checklist, but need to ask some hard, even rude,
questions. Why hesitate being tough-minded when it comes to protecting your financial life?
Individual investors have been left to trust the professionals -- the fund
managers, brokers, and advisers -- to ensure that their money is with the best
possible companies. Individuals, however, must still be responsible for their
own investments. We need to let the fund managers and professional investors
know that we now expect them to do their homework and recommend companies who
are not hiding behind technical compliance but are willing and able to disclose
fully what they are doing. Here is a list of questions that can be used to
start developing an understanding of companies.
Basic Financial Verification
- How can you explain the last three years of the company's
statements of cash flows and return on capital?
- What are the "off-balance-sheet" debt, revenue, and tax situations of the
corporations from the past three years to the present date?
- Does the corporation finance any part of its revenue by providing loans to
customers or any other outsiders?
- What does the corporation do to ensure that employees understand their legal
and ethical responsibilities?
- Does the company provide an independent "hotline" so that anyone in the
company can report fraud or suspicious activity without being fired and with
assurance of appropriate response?
- How has the company treated "whistle-blowers" in the past?
- Has any executive of the corporation been sued as a result of business fraud
or any other business-related activities?
- What do the most important customers say about the company and its management
- During the last three annual meetings, how has the leadership team responded
to and treated shareholder questions and comments?
The Board of Directors
- Who is on the board and what are the backgrounds, accomplishments, mistakes
and qualifications of the directors?
- How have the directors added value to the corporation over the last year, and
what do they plan to do in the next year?
- Has the board evaluated itself? How?
- What is the board's point of view on the following?
- Executive compensation
- Business ethics
- Social responsibility
- Shareholder recommendations
- Employee programs
- How will the audit committee of the board ensure that audits produce an
accurate picture of company performance? In addition, what steps has the board
taken to ensure accuracy and exactness in all managerial reporting inside and
outside of the corporation?
- How many board sessions are held each year, and what is their length?
- Does the board have outside consultants and advisory groups assisting them
with their work?
- Since many directors have given the excuse that they did not always know what
was going on in the business or otherwise demonstrated that they were not
competent to understand the business, how do we know that the current directors
understand the business?
- Do all of the directors own company stock?
This list is just for starters, an example of the kind of questions that shift
the burden to corporations to "show us" they are right. If you can't get
answers that satisfy you, then you know, one, perhaps two, things are wrong.
First, the investment "pro" you are dealing with doesn't have much in the way
of useful information. What are you paying him for? Second, the company that
can't or won't provide this information is suspect. As Enron unfolded,
reporters noted that Warren Buffet commented that if he could not understand an
annual report, perhaps the company did not intend for him to understand it.
A. Larry Elliott is the president and CEO of EDA, Inc., and a former
senior partner at Heidrick and Struggles, one of the world's leading executive
Dr. Richard J. Schroth is a consultant and advisor on emerging
technology and business strategy to many of the world's leading
From the Book: How Companies Lie: Why Enron is Just the Tip of the Iceberg by A. Larry Elliott and Richard J. Schroth. Copyright (c) 2002 by Richard J. Schroth andð A. Larry Elliott. To be published this month by Crown Business. Reprinted by permission of Crown Publishers, a division of Random House, Inc.
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